Insurance against financial catastrophe? The poor aren’t buying it

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Financial Inclusion

Insurance against financial catastrophe? The poor aren’t buying it

Consumers in Nepal using mobile-based financial services. Photo: S. Shakya for Mercy Corps.

Microinsurance is the darling of economists looking for a new way to alleviate poverty. For a pittance, they argue, the very poor can be saved from financial ruin in the event of a medical emergency or crop failure.

The problem is the poor don’t appear to be interested.

Whether it’s a lack of awareness or the lack of available cash, the people who could most benefit from the low-cost, low-premium, low-coverage insurance are not buying it at the rate proponents expected. And that is troubling to leaders who believe microinsurance is a stepping stone out of poverty.

At last week’s International Microinsurance Conference in Nigeria, the country’s Securities and Exchange Commission Director General Arunma Oteh said microinsurance was critical to the future of her own country:

“What we want is for Nigerians to be able to participate in the economy and I believe that microinsurance is absolutely essential in that regard,” Oteh said. “If we do not focus on microinsurance, we will not transform our society.”

There also may be unexpected benefits to explore. Having a life insurance policy, for example, may reduce the stigma for AIDS  patients in South Africa, according to The New York Times. AllLife provides hard-to-come-by life insurance for South Africans with HIV. The company’s efforts are changing the way people view those with the disease, said Ross Beerman, AllLife’s managing director.

“We’re saying you don’t have a terminal illness,” Beerman said. “You have a chronic, manageable disease. You’re going to live a long time. And we’ll help you.”

However, a new report by the International Labour Organization, "Why People Do Not Buy Microinsurance and What We Can Do About It," (pdf) claims that the poor simply aren’t buying it, or at least not at the rates that economists expected from a service that protects those who already live on the brink of financial catastrophe.

Some government officials say the problem is simply a lack of awareness or understanding. Cebuana Lhuillier Insurance Solutions launched “Microinsurance on Wheels” in the Philippines this week. The program will send eight vans to 700 key districts to teach people about microinsurance that protects policyholders from accidental death, dismemberment, or fire. Deputy Insurance Commissioner Ferdinand George A. Florendo says the only barrier to success is awareness.

“What needs to be done is to inform the people,” Florendo said. “If they are informed, they will definitely avail of the insurance.”

However, the International Labour Organization begs to differ. According to its report, which culls data from over 30 studies into demand for microinsurance, education about insurance and other financial products will increase people’s awareness and knowledge--clearly a benefit in and of itself--but may not lead to more people buying insurance. Awareness is just one of seven factors that contribute to a person’s decision to buy microinsurance.

It’s important when the microinsurance is available.

A commonly held belief is that microinsurance is simply too expensive for the world’s poor, who often live on less than $200 per month, and the extreme poor, who survive on less than $2 per day. But it isn’t the lack of money that prevents poor people from purchasing insurance, according to the report's list of key factors -- it’s the timing. The poor can’t afford payments throughout the entire year. But they are more likely to buy if the policy is offered at a time when they have money, such as at the end of the harvest season.

Microinsurance sellers have to overcome some barriers if they want consumers to buy. But there are ways to break down barriers, suggests the report. By sending trusted members of the community to do outreach about the product, insurers can build rapport through a proxy. Similarly, telling success stories of claims that were paid out and prevented catastrophe in the consumer’s own neighborhood can promote the idea that insurance is actually needed.

One thing is for certain, however: Proponents need to tailor products and marketing strategies to the people buying them, instead of simply sticking with methods that work in other markets.

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